French Overtake U.K. Banks for U.S. Money Fund Investment

Jan. 11 (Bloomberg) -- The 10 largest U.S. money-market
funds’ holdings of French bank securities overtook their British
counterparts for the first time in at least 16 months on growing
confidence in the euro region and cheap U.K. state funding that
lessened the need to issue short-term debt.

The funds’ French bank holdings increased by $9.6 billion
to $42.8 billion in December, while British banks were cut by
$11.2 billion to $29.4 billion, according to a survey of the
fund bank holdings by Bloomberg Brief: Risk Newsletter. The bank
with the largest increase was Natixis SA, the investment-banking
unit of Groupe BPCE, France’s second-largest lender by branches.

Holdings of French bank securities by U.S. money funds have
recovered to the highest since August 2011, when investors were
dumping French paper on concern that the European debt crisis
was putting banks’ health at risk. In the U.K., the Funding for
Lending Scheme from the Bank of England has allowed lenders such
as Royal Bank of Scotland Group Plc to reduce their use of money
funds and more expensive shorter-term senior bonds.

“Prime money market funds have slowly crept back to French
banks over the course of 2012, highlighting the significantly
lower funding risks emanating out of Europe,” JPMorgan Chase &
Co. analyst Alex Roever said in a Jan. 10 report. “Barring any
hiccups out of Europe, we expect this trend to continue in
2013.”

Natixis attracted an extra $6.76 billion in December, the
largest nominal increase among the 40 banks included in the
survey. The 10 funds now hold $11.68 billion in Natixis paper.
The largest reduction among the banks was in RBS securities,
which declined by $7.35 billion in the month.

Safety Margins

The other French banks included in the survey were BNP
Paribas SA, Societe Generale SA and Credit Agricole SA. Bank
restructurings have reduced the overall level of demand for
money market funding, meaning the December total is still less
than half the nearly $90 billion the four French banks said they
held for the second half of 2010.

Banks have increased liquidity reserves to match their use
of short-term funding. Natixis’s parent, BPCE, had 117 billion
euros ($153.3 billion) of total short-term refinancing
outstanding at the end of September, according to its Nov. 14
third-quarter earnings presentation. Its liquidity reserves
increased to 150 billion euros at the end of the third quarter,
up from 133 billion euros on June 30.

“We don’t think we’re living through a time during which we
could reduce safety margins when it comes to liquidity,” Jean
Cheval, director of finance and risk at Natixis, said on a Nov.
15 earnings call with analysts. “We do not consider that we need
to increase this buffer significantly, but we think that we are
at the right level today.”

RBS Reductions

Andrea Pucnik, a spokeswoman at Natixis, declined to
comment further.

Fidelity Investments, the biggest provider of U.S. 401(k)
retirement plans, has three funds included in the survey. Among
them, they increased holdings of Natixis by $7.31 billion in
December. JPMorgan’s Prime Money Markets Fund boosted its
holdings of the French bank by $1.47 billion. Officials at
Fidelity and JPMorgan didn’t respond to requests for comment.

RBS reduced its overall use of short-term wholesale funding
by 53 billion pounds ($84.9 billion) in the first nine months to
49 billion pounds, according to a Nov. 2 presentation on the day
of the government-controlled bank’s third-quarter results. The
bank holds a 147-billion-pound liquidity buffer to cover short-term borrowing.

Liquidity Buffer

“This now represents only 5 percent of our funded balance
sheet, well below our peer group.” Bruce Van Saun, finance
director at RBS, said on the Nov. 2 earnings call. “The
liquidity buffer cover of short-term wholesale funding rose to
three times from 2.5 times at the half year.” An RBS spokeswoman
declined to comment further today.

In addition to selling commercial paper, certificates of
deposit and repurchase agreements to money funds, banks can
obtain short-term funding from central banks, interbank
repurchase agreements, or by increasing deposit rates to attract
more money from individual customers. Banks also hold cash-like
instruments in a liquidity pool to meet redemptions.